Overview
On May 10, 2016, U.S. District Judge Paul A. Crotty finally approved a $110 million settlement in the mortgage-backed securities class action brought by investors against Credit Suisse AG and its affiliates. This settlement ends claims brought by the New Jersey Carpenters Health Fund and other investors who claimed that the offering documents for the mortgage-backed securities at issue violated the Securities Act as they contained false and misleading misstatements concerning compliance with underwriting standards.
Case Update
On January 6, 2016, U.S. District Judge Paul A. Crotty preliminarily approved a $110 million settlement in the mortgage-backed securities class action brought by investors against Credit Suisse AG and its affiliates. The court granted final approval on May 9, 2016.
On March 17, 2014, Judge Crotty issued an opinion further expanding the certified class to include all purchasers of the Home Equity Mortgage Trust, Series 2007-2 Certificates, finding again that all of the Rule 23 factors for class certification had been met. On July 9, 2014, the Court issued an order approving the form and manner of notifying the expanded class of this pending class action.
On August 16, 2011, Judge Paul A. Crotty issued the first written opinion in the country certifying a class of mortgage-backed securities. The Court held that a class of purchasers of the Home Equity Mortgage Trust, Series 2006-5 Certificates bringing suit under Sections 11, 12, and 15 of the Securities Act of 1933 met all the requirements of Rule 23 for class certification.
Case Background
Cohen Milstein represents Lead Plaintiff, New Jersey Carpenters Health Fund (“Carpenters”), in a securities class action lawsuit pending in the United States District Court for the Southern District of New York. The Defendants named in the action are Credit Suisse Securities (USA), LLC (“CSS”), DLJ Mortgage Capital, Inc. (“DLJMC”), Credit Suisse Management, LLC f/k/a Credit Suisse First Boston Mortgage Securities Corp (“CSFBMC”) and certain officers and directors of CSFBMC (the “Individual Defendants”). This action was brought pursuant to the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77a, et seq., on behalf of Plaintiff and as a class action on behalf of all persons and entities (the “Class”) who purchased or otherwise acquired interests in certain Home Equity Mortgage Trusts (the “HEMT Trusts” or “Issuing Trusts”), pursuant to a single Registration Statement and accompanying Prospectus filed by CSFBMC with the Securities and Exchange Commission (the “SEC”) on August 10, 2006 (the “Registration Statement”). Pursuant to the Registration Statement and the later-filed Prospectus Supplements incorporated therein (collectively, the “Offering Documents”), Defendant CSS underwrote and sold to Lead Plaintiff and the Class $2.39 billion of Home Equity Mortgage Trust Pass-Through Certificates (the “HEMT Certificates”). The HEMT Certificates were issued in four (4) Offerings which took place between August 28, 2006 and April 27, 2007 (the “HEMT Offerings”).
The lawsuit alleges, inter alia, that the Offering Documents contained material misstatements and omissions of material facts in violation of Sections 11 and 12 of the Securities Act, including the failure to disclose that: (i) the mortgage loan collateral underlying the Certificates was not originated in accordance with the stated mortgage loan underwriting guidelines set forth in the Registration Statement and the Prospectus Supplements (ii) CSS failed to conduct adequate, and in some cases any, due diligence with respect to compliance with the stated mortgage loan underwriting guidelines; (iii) the stated credit enhancement did not support the investment grade ratings assigned to the Certificates in light of the true undisclosed and impaired quality of the mortgage collateral; (iv) there were material undisclosed conflicts of interest among the various Defendants, including the undisclosed “ratings shopping practices” Defendants engaged in; and (v) the amount of credit enhancement provided to the Certificates was inadequate to support the AAA and investment grade ratings because those amounts were determined primarily by Ratings Agencies’ models which had not been updated in a timely manner. Soon after issuance of the Certificates, and as a result of massive increases in borrower delinquency, foreclosure, repossession and bankruptcy in the mortgage loans underlying the Certificates revealing the true defective nature of the collateral, the value of the Certificates collapsed.
On March 29, 2010, Judge Crotty issued a decision denying in part Defendants’ pending motion to dismiss. Although granting dismissal of Plaintiff’s claims as to the Rating Agencies’ role in structure the Certificates and the undisclosed conflicts of interest, the Court allowed Plaintiff’s claims as to CSS’ inadequate due diligence and the originators’ systematic disregard of the stated underwriting guidelines. In doing so, Judge Crotty stated:
Taken as a whole, the Offering Documents lend the clear impression that controls and oversight mechanisms were in place and that, in fact, the mortgage Originators were evaluating the creditworthiness of borrowers and appraising the value of the subject properties. Investors reasonably assumed that in offering mortgage-backed securities, the Defendants conducted adequate due diligence to ensure the accuracy of their representations. The Complaint alleges systemic borrower defaults, complete lack of controls and oversight, and flagrant violations of the Guidelines. According to the Plaintiff, the mortgage Originators and Defendants acted with reckless abandon in their zeal to generate loan volume and profits. The cautionary language and risk disclosures in the Offering Documents do not convey the severity of the investment risk – a risk already present at the time of the Offering.
The allegations here are extreme, yet plausible in light of the rapid and precipitous decline in market value, concurrent with skyrocketing mortgage loan delinquency rates and plummeting credit ratings.
Further, in rejecting Defendants’ argument that Plaintiff’s had failed to allege a cognizable loss based on the collapse in the HEMT Certificates’ value, the Court stated:
Many fixed-income debt securities, such as corporate bonds do not trade on national exchanges and yet institutional investors routinely purchase corporate bonds hoping to realize a profit through resale. Plaintiff may have purchased the Certificates expecting to resell them, making market value the critical valuation marker for Plaintiff. This is a securities claim, not a breach of contract case. Mortgage-backed Certificates are a type of security, which is why, in fact, the SEC has adopted a regulatory scheme relating to pooled asset-backed securities: 17 C.F.R. § 229.1111. At this stage all that may be said is Plaintiff’s market value allegations are sufficient
While allowing Plaintiff’s claims to proceed, the Court did hold that Plaintiff had standing to sue only on the Offerings in which they had purchased, namely Home Equity Mortgage Trust 2006-5. As a result, the Court dismissed, without prejudice, the claims as to the three Offerings that Lead Plaintiff had not purchased on.
However, on May 20, 2010, Mississippi Public Employees Retirement System filed a motion to intervene as an additional named plaintiff on behalf of purchasers in two of the dismissed HEMT Offerings, Home Equity Mortgage Trust 2006-4 and Home Equity Mortgage Trust 2006-6.